Multiple taxes behind increased cost of production in PakistanBreaking

May 02, 2024

Multiple taxes at the federal and provincial levels have increased the cost of production for the manufacturing sector. The performance of the industrial sector, which showed a negative growth of 2.94% in FY2023, mainly depends on the manufacturing sector, which has a share of 65% in the industry. Talking to WealthPK, Asim Ahmed, former finance secretary and chairman of FBR, said the manufacturing sector contributes 20 percent to the GDP and accounts for over 60 percent of the total taxes collected. All other federal and provincial taxes, except the corporate income tax, are indirect taxes which contribute to an increase in the cost of manufacturing. The manufacturing industry is subject to the ordinary sales tax rate of 18%, and supplies to the unregistered firms (SMEs) are subject to a further 4 percent sales tax. He further explained that the manufacturing and industrial units also serve as withholding agents but the FBR does not compensate them, which raises the cost of production. The electricity use is also subject to the withholding tax.

If an industrial unit’s monthly electricity bill exceeds Rs20,000, Rs1950 withholding tax is charged plus five percent of the excess amount. “The manufacturing sector is a major contributor to the economic growth, employment generation, competitiveness, and trade development, but the Large Scale Manufacturing (LSM) sector’s cost of doing business has increased due to the payment of several provincial and federal taxes,’’ Asim said. Speaking to WealthPK, Shafqat Ullah, a professor at the Economics Department of the National University of Modern Languages (NUML), said the industries are also bound to provide health and old age-related payments in addition to the provincial and local taxes such as property tax, stamp duty, and zila tax. The other provincial and local taxes include municipal corporation tax, labor levies, professional tax, and employee social securities, he added. “The FBR should tax non-essential items such as cigarettes and other health-hazardous items to boost tax revenue, improve public health, and reduce the tax burden on other industries.

This will provide them with a conducive environment for their growth, bring more tax revenue to the tax authorities, and increase financial inclusion,’’ he said. Shafqat explained that multiple taxes impact the quality of goods and services available, as they influence the factors that determine the GDP per capita of a country such as labor, capital, and productivity. Multiple taxes also influence a firm’s incentives to invest and hire employees, which can lead to inefficient allocation of input factors and lower productivity. He opined that the government should reform its taxation system to provide a favorable environment to the manufacturing sector and investors for the industrial sector’s growth and advancement.

Credit: Independent News Pakistan